A lot can happen in a year -- especially when you are talking about red-hot growth stocks like Palantir Technologies (PLTR 1.62%), which has already jumped around 412% over the last 12 months. The company is benefiting from surging adoption of artificial intelligence (AI) solutions, especially in law enforcement and military contexts. But with shares near all-time highs, can it maintain its lofty valuation? Let's dig deeper to find out.

A new age of warfare and surveillance

Founded in 2003, Palantir arguably helped pioneer AI before it was trendy. The company specializes in big data analytics -- offering software-as-a-service (SaaS) platforms that allow clients to sift through vast amounts of information to identify actionable trends, detect fraud, or optimize their supply chains. It serves enterprises and high-profile public sector clients like the U.S. Department of Defense (DoD).

While this technology is different from the generative AI behind large language models (LLMs) like OpenAI's ChatGPT, the synergies are substantial. LLMs make Palantir's software much easier to use because operators can perform analysis with simple text prompts instead of complex commands. It also enables these tools to be used in fast-paced real-world scenarios like battlefields or law enforcement operations.

Palantir launched its Artificial Intelligence Platform (AIP) in 2023, and that likely has a lot to do with the stock's booming growth since then. The market also seems to have correctly predicted that Trump's election victory would benefit Palantir, even though his campaign initially promised to reduce the military budget and government spending in general.

The "big, beautiful bill"

On July 3, Congress passed Trump's "big, beautiful bill," which should be seen as a bullish catalyst for Palantir. According to the BBC, the bill will allocate an additional $150 billion to military expenditures, some of which will fund next-generation capabilities such as AI. Military modernization has already become a massive opportunity for Palantir.

In April, the company inked a deal with the North Atlantic Treaty Organization (NATO) to provide its Maven Smart System, designed to help with battlefield awareness and planning. And Palantir is already working with the armed forces of Israel and Ukraine for battlefield targeting. The bill will also increase funding to domestic law enforcement, such as immigration and customs enforcement (ICE), which has historically used Palantir's software for some of its deportation efforts.

Image source: Getty Images.

Palantir's first-quarter earnings were quite good, with revenue jumping 39% year over year to $883.9 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 45% to $397.3 million. The new legislation could be a catalyst for accelerated growth.

Where will Palantir be in the next year?

Palantir is an exciting company with plenty of opportunities for future growth as generative AI technology becomes more mainstream, and Trump's bill increases the budgets for many of its public sector clients. That said, a great company isn't always a good investment.

With a price-to-earnings (P/E) multiple of 574, Palantir's valuation towers above the S&P 500 index average of around 30 and even other AI-related stocks like Nvidia and Microsoft, which boast P/Es of 51 and 38, respectively.

The premium suggests most of Palantir's positive catalysts are already priced in. And over the next year and beyond, stock performance will likely be driven by hype instead of a realistic assessment of the company's fundamentals. This doesn't mean it's time to short Palantir stock -- the market can stay irrational longer than you can stay solvent. However, investors who already own shares should consider taking profits.